Currency Wars_ The Making of the Next Global Crisis - James Rickards [24]
Among that group of nations that eventually gravitated to gold standards in the latter third of the 19th century (i.e., the gold club), abnormal capital movements (i.e., hot money flows) were uncommon, competitive manipulation of exchange rates was rare, international trade showed record growth rates, balance-of-payments problems were few, capital mobility was high (as was mobility of factors and people), few nations that ever adopted gold standards ever suspended convertibility (and of those that did, the most important returned), exchange rates stayed within their respective gold points (i.e., were extremely stable), there were few policy conflicts among nations, speculation was stabilizing (i.e., investment behavior tended to bring currencies back to equilibrium after being displaced), adjustment was quick, liquidity was abundant, public and private confidence in the international monetary system remained high, nations experienced long-term price stability (predictability) at low levels of inflation, long-term trends in industrial production and income growth were favorable and unemployment remained fairly low.
This highly positive assessment by Gallarotti is echoed by a study published by the Federal Reserve Bank of St. Louis, which concludes, “Economic performance in the United States and the United Kingdom was superior under the classical gold standard to that of the subsequent period of managed fiduciary money.” The period from 1870 to 1914 was a golden age in terms of noninflationary growth coupled with increasing wealth and productivity in the industrialized and commodity-producing world.
A great part of the attraction of the classical gold standard was its simplicity. While a central bank might perform certain functions, no central bank was required; indeed the United States did not have a central bank during the entire period of the classical gold standard. A country joining the club merely declared its paper currency to be worth a certain amount in gold and then stood ready to buy or sell gold at that price in exchange for currency in any quantity from another member. The process of buying and selling gold near a target price in order to maintain that price is known today as an open market operation. It can be performed by a central bank, but that is not strictly necessary; it can just as well be performed by a government operating directly or indirectly through fiscal agents such as banks or dealers. Each authorized dealer requires access to a reasonable supply of gold with the understanding that in a panic more gold could readily be obtained. Although government intervention is involved, it is conducted transparently and can be seen as stabilizing rather than manipulating.
The benefit of this system in international finance is that when two currencies become anchored to a standard weight of gold, they also became anchored to each other. This type of anchoring does not require facilitation by institutions such as the IMF or the G20. In the classical gold standard period, the world had all the benefits of currency stability and price stability without the costs of multilateral overseers and central bank planning.
Another benefit of the classical gold standard was its self-equilibrating nature not only in terms of day-to-day open market operations but also in relation to larger events such as gold mining production swings. If gold supply increased more quickly than productivity, which happened on occasions such as the spectacular discoveries in South Africa, Australia and the Yukon between 1886 and 1896, then the price level for goods would go up temporarily. However, this would lead to increased costs for gold producers that would eventually lower production and reestablish the long-term trend of price stability. Conversely, if economic productivity increased due to technology, the price level would fall temporarily, which